Struggling Asia Dollar Bonds Face Pressure From China Supply

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(Bloomberg) -- Asia’s dollar bond market, already under pressure as borrowers rush to price deals before interest rates rise, is set to take a further hit from China.

China’s National Development and Reform Commission, the nation’s top economic planning agency, has extended the deadline for offshore bond sales for 16 Chinese issuers to the end of the year, according to a document obtained by Bloomberg. That means even more issuers are expected to sell debt in the offshore market, with companies including developers China South City Holdings Ltd. and Tahoe Group Co. Ltd. securing extensions, according to the document.

The NDRC’s quota approvals in recent years have become a key driving force for Asia’s offshore bond market due to China’s rising share in the region’s dollar bond issuance. While the regulator’s moves to grant offshore bond approvals will help ease funding stress for some firms, the somewhat opaque way the approval process works creates uncertainties.

"This to me means the supply overhang will last beyond initial expectations and put pressure on secondary performance," said Anne Zhang, executive director for fixed income, currencies and commodities at JPMorgan Private Bank in Asia.

Dollar bond supply in Asia is typically front-loaded as issuers aim to complete their funding by June. With the region’s issuance so far this year running above the five-year average and credit spreads 11 basis points higher than the same period last year, new issue premiums are on the rise.

Chinese companies flooded the Asia dollar bond market on Thursday with four book-building deals. They include Yuexiu Property Co. and Fujian Yango Group Co., while Beijing Enterprises Water Group Ltd. is set to meet investors from April 13 for a potential bond.

Critical Mass

“The market is extremely sensitive to generous NDRC approvals at present, given rising funding costs,” said Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group Ltd. “USD China bond markets have reached a critical mass of $400 billion and regulators should be increasingly aware of the need to manage sentiment in this respect, similar to the IPO windows in previous years.”

The NDRC didn’t immediately reply to a fax from Bloomberg seeking comment on the issuance quotas.

The following companies got an extension to their bond issuance quota till year-end, according to the document:

  • Wuzhou International Holdings Ltd., Ginwa Investment Holding Group Co. Ltd., Zhongrong Xinda Group Co. Ltd., Ping An Bank Co. Ltd., Linca Group, Sino Grandness Food Industry Group Ltd., Jujiang Construction Group Co. Ltd., Dongling Group Inc. Co., Sichuan Province Juyang Group Ltd., Bank of Beijing Financial Leasing Co., Henan Energy and Chemical Industry Group Co. Ltd., Gangtai Group Co. Ltd., Chengtun Mining Group Co. Ltd. and Guangyang Antai Holdings Ltd.

Company officials from Wuzhou International, Dongling Group, Jujiang Construction Group and Sichuan Province Juyang confirmed the quota extension when reached by Bloomberg on the phone. Zhongrong Xinda declined to comment while calls to Ginwa, Linca, Tahoe, Gangtai Group, Henan Energy and Chemical Industry Group went unanswered. Officials at Ping An Bank, Bank of Beijing Financial Leasing, Sino Grandness Food Industry Group, Guangyang Antai and Chengtun Mining Group couldn’t be reached on the phone. An investor relations officer at China South City didn’t immediately comment.

Investors are not necessarily thrilled with the choice of offerings in the market.

“We are actually more comfortable taking the risk compensation from stronger issuers rather than lower rated debut issuers," said Chak Lau, a credit investment manager at Dongxing Securities (HK) Asset Management Co. in Hong Kong. “Those who were not able to use up the quota before it got expired, I don’t think there is going to be any change even with the deadline extension.”

©2018 Bloomberg L.P.

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